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POTASH CORP OF SASKATCHEWAN INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis is the responsibility of management and is as of October 28, 2014. The Board of Directors carries out its responsibility for review of this disclosure principally through its audit committee, comprised exclusively of independent directors. The audit committee reviews and, prior to its publication, approves this disclosure, pursuant to the authority delegated to it by the Board of Directors. The term "PCS" refers to Potash Corporation of Saskatchewan Inc. and the terms "we," "us," "our," "PotashCorp" and "the company" refer to PCS and, as applicable, PCS and its direct and indirect subsidiaries as a group. Additional information relating to PotashCorp, including our Annual Report on Form 10-K for the year ended December 31, 2013 (Form 10-K), can be found on SEDAR at www.sedar.com and on EDGAR at www.sec.gov. The company is a foreign private issuer under the rules and regulations of the US Securities and Exchange Commission (the SEC); however, it currently files voluntarily on the SEC's domestic forms. PotashCorp and Our Business Environment PotashCorp is an integrated producer of fertilizer, industrial and animal feed products. We are the world's largest fertilizer company by capacity, producing the three primary crop nutrients: potash (K), nitrogen (N) and phosphate (P). As the world's largest potash producer by capacity, we are responsible for nearly one-fifth of global capacity through our Canadian operations. To enhance our global footprint, we have investments in four potash-related businesses in South America, the Middle East and Asia. We complement our potash assets with focused positions in nitrogen and phosphate. A detailed description of our market and customers can be found on pages 54 and 55 (potash), 65 (nitrogen) and 73 (phosphate) in our 2013 Annual Integrated Report. PotashCorp Strategy Our business strategy is detailed on pages 20 to 23 in our 2013 Annual Integrated Report. Key strategies, risks and mitigation are outlined for each of our nutrients on pages 52 (potash), 63 (nitrogen) and 71 (phosphate) in our 2013 Annual Integrated Report. Key Performance Drivers - Performance Compared to Targets Through our integrated value model, we set, evaluate and refine our goals and priorities to drive improvements that benefit all those impacted by our business. We demonstrate our accountability by tracking and reporting our progress against targets related to each goal. Our long-term goals and 2014 targets are set out on pages 40 to 50 of our 2013 Annual Integrated Report. A summary of our progress against selected goals and representative annual targets is set out below. Goal Representative 2014 Annual Target Performance to September 30, 2014 Create superior Exceed total shareholder return PotashCorp's total shareholder return long-term performance for our sector and the was 8 percent in the first nine months shareholder DAXglobal Agribusiness Index. of 2014 compared to our sector's value. weighted average return (based on market capitalization) of NIL percent and the DAXglobal Agribusiness Index weighted average return (based on market capitalization) of 1 percent. Be the supplier Reduce domestic potash net rail cycle The domestic potash net rail cycle time of choice to time through the Chicago corridor by through the Chicago corridor during the the markets we 10 percent in 2014, compared to 2011 third quarter of 2014 did not show serve. levels. improvement to the second quarter 2014 performance or any of the prior third quarterperiods. Persistent congestion created from an increase in North American rail volumes coupled with a shortage of locomotive power and crews continued to yield lower train velocity than thefirst nine months of 2013. Our 2014 third quarter net rail cycle time was 28 percent above the prior year third quarter and 16 percent above the 2011 benchmark quarter. For the first nine months of 2014, our domestic potash net rail cycle time through the Chicago corridor was 29 percent above the prior year period and 28 percent above the benchmark2011 performance. We continue to work with our rail partners to increase efficiency and reduce transit times but we currently believe we will not be able to achieve the stated goal of a 10percent reduction in net rail cycle times during the 2014 calendar year. Attract and Fill 75 percent of senior staff openings The percentage of senior staff positions retain talented, with qualified internal candidates. filled internally in the first nine motivated and months of 2014 was 84 percent. productive employees who are committed to our long-term goals. Achieve no harm Achieve zero life-altering injuries at Tragically, we had a fatality at our to people. our sites. Cory potash facility during the first quarter of 2014. Reduce total site recordable injury rate During the first nine months of 2014, to total site recordable injury rate 0.95 (per 200,000 hours worked) or lower. was 1.20. Achieve no Reduce total reportable incidents Annualized total reportable incidents damage to the (releases, permit excursions and spills) were up 49 percent during the first nine environment. by 15 percent from 2013 levels. months of 2014 compared to 2013 annual levels. Compared to the first nine months of 2013, total reportable incidents were up 46 percent. PotashCorp 2014 Third Quarter Quarterly Report on Form 10-Q 16 -------------------------------------------------------------------------------- Share Repurchase Program In the second quarter of 2014, the company completed a share repurchase program as described in Note 5 to the financial statements in this Form 10-Q. During the program a total of 43,345,992 common shares were repurchased for cancellation at a cost of $1,476 million and an average price per share of $34.05. Performance Overview This discussion and analysis are based on the company's unaudited interim condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q (financial statements in this Form 10-Q) based on International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS), unless otherwise stated. All references to per-share amounts pertain to diluted net income per share. For an understanding of trends, events, uncertainties and the effect of critical accounting estimates on our results and financial condition, this Form 10-Q should be read carefully, together with our 2013 Annual Integrated Report. Earnings Guidance - Third Quarter 2014 Company Guidance Actual Results Earnings per share $0.35 - $0.45 $ 0.38 Overview of Actual Results Three Months Ended September 30 Nine Months Ended September 30 Dollars (millions) - except per-share amounts 2014 2013 Change % Change 2014 2013 Change % Change Sales $ 1,641 $ 1,520 $ 121 8 $ 5,213 $ 5,764 $ (551 ) (10 ) Gross margin 589 484 105 22 1,901 2,330 (429 ) (18 ) Operating income 520 505 15 3 1,737 2,249 (512 ) (23 ) Net income 317 356 (39 ) (11 ) 1,129 1,555 (426 ) (27 ) Net income per share - diluted 0.38 0.41 (0.03 ) (7 ) 1.33 1.77 (0.44 ) (25 ) Other comprehensive loss (229 ) (258 ) 29 (11 ) (178 ) (561 ) 383 (68 ) [[Image Removed: LOGO]] [[Image Removed: LOGO]] Earnings in the third quarter of 2014 were lower than the third quarter of 2013 as increases in potash and nitrogen gross margin were more than offset by higher provincial mining and other taxes, higher income taxes, lower share of earnings of equity-accounted investees and lower dividend income. For the first nine months of 2014, earnings were primarily impacted by lower potash gross margin, higher nitrogen gross margin, lower phosphate gross margin, lower share of earnings of equity-accounted investees, and lower income taxes. Unlike 2013, when global potash demand stalled due to market uncertainty, this year's third quarter saw all key markets engaged. This shift was most significant offshore, with greater demand in Asian and Latin American markets leading to higher shipments from North American producers. Purchasing activity in North America remained healthy as dealers worked to position product in advance of anticipated fall requirements. Global potash shipments through the first nine months of 2014 were at all-time highs. During the third quarter, typical maintenance downtime further tightened market fundamentals and resulted in prices moving higher in all major spot markets. 17 PotashCorp 2014 Third Quarter Quarterly Report on Form 10-Q -------------------------------------------------------------------------------- In nitrogen, strong global demand and supply constraints in key exporting countries led to higher prices for ammonia. Improved fundamentals contributed to higher prices for urea and UAN products compared to the prior year, although greater supply availability in urea caused prices to show signs of seasonal softness as the quarter came to a close. Similarly, phosphate prices for third-quarter 2014 were stronger relative to the previous year, given healthier demand and the influence of higher input and production costs. Other comprehensive loss for the third quarter and first nine months of 2014 mainly resulted from a decrease in the fair value of our investment in Israel Chemicals Ltd. (ICL). Other comprehensive loss for the third quarter of 2013 was due to decreases in the fair value of our investments in ICL and Sinofert Holdings Limited (Sinofert). For the first nine months of 2013, these reductions were partially offset by a net actuarial gain resulting from a remeasurement of our defined benefit plans. Statement of Financial Position [[Image Removed: LOGO]] PotashCorp 2014 Third Quarter Quarterly Report on Form 10-Q 18 -------------------------------------------------------------------------------- The most significant contributors to the changes in our statements of financial position were as follows (direction of arrows refers to increase or decrease): Assets Liabilities h Property, plant and equipment h Short-term debt and current portion increased primarily due to our of long-term debt increased due to the previously announced potash and reclassification of $500 million in nitrogen capacity expansions and other senior notes due September 30, 2015 as potash projects, partially offset by current in the third quarter of 2014 routine and accelerated depreciation. and an increase in commercial paper outstanding, partially offset by the i Available-for-sale investments were redemption of $500 million in senior mainly impacted by the lower fair value notes in the second quarter of 2014. of our investment in ICL. i Payables and accrued charges were lower largely due to reduced capital spending and share repurchase payables outstanding at December 31, 2013. h Long-term debt was higher as a result of the issuance of $750 million in senior notes in the first quarter of 2014, partially offset by our senior notes due September 30, 2015 being classified as current during the third quarter of 2014. Equity i Equity was mainly impacted by net income (discussed in more detail above), dividends declared and common shares repurchased for cancellation (see Note 5 to the financial statements in this Form 10-Q) during the first nine months of 2014. As at September 30, 2014, $91 million (December 31, 2013 - $480 million) of our cash and cash equivalents were held in certain foreign subsidiaries. There are no current plans to repatriate the funds at September 30, 2014 in a taxable manner. A net repatriation of funds totaling $454 million was completed in the first quarter of 2014. Operating Segment Review We report our results (including gross margin) in three business segments: potash, nitrogen and phosphate as described in Note 6 to the financial statements in this Form 10-Q. Our reporting structure reflects how we manage our business and how we classify our operations for planning and measuring performance. We include net sales in segment disclosures in the financial statements in this Form 10-Q pursuant to IFRS, which require segmentation based upon our internal organization and reporting of revenue and profit measures. As a component of gross margin, net sales (and the related per-tonne amounts) are the primary revenue measures we use and review in making decisions about operating matters on a business segment basis. These decisions include assessments about potash, nitrogen and phosphate performance and the resources to be allocated to these segments. We also use net sales (and the related per-tonne amounts) for business planning and monthly forecasting. Net sales are calculated as sales revenues less freight, transportation and distribution expenses. Realized prices refer to net sales prices. Certain of the prior years' figures within the nitrogen segment have been reclassified to conform with the current year's presentation as disclosed in Note 13 to the financial statements in this Form 10-Q. Our discussion of segment operating performance is set out below and includes nutrient product and/or market performance results, where applicable, to give further insight into these results. [[Image Removed: LOGO]] 19 PotashCorp 2014 Third Quarter Quarterly Report on Form 10-Q -------------------------------------------------------------------------------- Potash Potash Financial Performance Three Months Ended September 30 Dollars (millions) Tonnes (thousands) Average per Tonne (1) 2014 2013 % Change 2014 2013 % Change 2014 2013 % Change Manufactured product Net sales North America $ 272 $ 240 13 789 721 9 $ 344 $ 333 3 Offshore 293 240 22 1,221 843 45 $ 240 $ 285 (16 ) 565 480 18 2,010 1,564 29 $ 281 $ 307 (8 ) Cost of goods sold (264 ) (248 ) 6 $ (131 ) $ (159 ) (18 ) Gross margin 301 232 30 $ 150 $ 148 1Other miscellaneous and purchased product gross margin (2) (6 ) (4 ) 50 Gross Margin $ 295 $ 228 29 $ 147 $ 146 1 (1) Rounding differences may occur due to the use of whole dollars in per-tonne calculations. (2) Comprised of net sales of $4 million (2013 - $2 million) less cost of goods sold of $10 million (2013 - $6 million). Nine Months Ended September 30 Dollars (millions) Tonnes (thousands) Average per Tonne (1) 2014 2013 % Change 2014 2013 % Change 2014 2013 % Change Manufactured product Net sales North America $ 866 $ 923 (6 ) 2,720 2,349 16 $ 318 $ 393 (19 ) Offshore 942 1,271 (26 ) 4,126 3,986 4 $ 228 $ 319 (29 ) 1,808 2,194 (18 ) 6,846 6,335 8 $ 264 $ 346 (24 ) Cost of goods sold (799 ) (842 ) (5 ) $ (117 ) $ (133 ) (12 ) Gross margin 1,009 1,352 (25 ) $ 147 $ 213 (31 ) Other miscellaneous and purchased product gross margin (2) (19 ) (7 ) 171 Gross Margin $ 990 $ 1,345 (26 ) $ 145 $ 212 (32 ) (1) Rounding differences may occur due to the use of whole dollars in per-tonne calculations. (2) Comprised of net sales of $14 million (2013 - $9 million) less cost of goods sold of $33 million (2013 - $16 million). Potash gross margin variance attributable to: Three Months Ended September 30 Nine Months Ended September 30 2014 vs. 2013 2014 vs. 2013 Change in Change in Prices/Costs Prices/Costs Change in Net Cost of Change in Net Cost of Dollars (millions) Sales Volumes Sales Goods Sold Total Sales Volumes Sales Goods Sold Total Manufactured product North America $ 13 $ 13 $ 7 $ 33 $ 114 $ (203 ) $ 16 $ (73 ) Offshore 90 (69 ) 15 36 33 (373 ) 70 (270 ) Change in market mix 13 (12 ) (1 ) - (14 ) 13 1 - Total manufactured product $ 116 $ (68 ) $ 21 $ 69 $ 133 $ (563 ) $ 87 (343 ) Other miscellaneous and purchased product (2 ) (12 ) Total $ 67 $ (355 ) PotashCorp 2014 Third Quarter Quarterly Report on Form 10-Q 20 -------------------------------------------------------------------------------- [[Image Removed: LOGO]] [[Image Removed: LOGO]] Offshore sales to major markets, by percentage of sales volumes, were as follows: Three Months Ended September 30 Nine Months Ended September 30 By Canpotex (1) From New Brunswick By Canpotex (1) From New Brunswick 2014 2013 % Change 2014 2013 % Change 2014 2013 % Change 2014 2013 % Change Other Asian countries (2) 38 39 (3 ) - - - 42 41 2 - - - Latin America 32 34 (6 ) 100 100 - 29 28 4 100 100 - China 9 8 13 - - - 13 17 (24 ) - - - India 14 9 56 - - - 9 8 13 - - - Oceania, Europe and Other 7 10 (30 ) - - - 7 6 17 - - - 100 100 100 100 100 100 100 100 (1) Canpotex Limited (Canpotex). (2) All Asian countries except China and India. The most significant contributors to the change in total gross margin quarter over quarter were as follows (direction of arrows refers to impact on gross margin): Net Sales Prices Sales Volumes Cost of Goods Sold i Our average realized h Offshore sales volumes h Costs were lower due potash price trailed last were up as the comparative to our workforce year's third quarter due to period in 2013 saw reduction and lower offshore prices as significantly more operational changes the sharp decline through volatility and announced in December the final half of 2013 had uncertainty. 2013 along with our yet to be fully reflected decision to optimize in prior-period results. A h In North America, sales production at our lowest greater proportion of sales volumes increased as cost facility. to lower-priced offshore customers took deliveries markets also had a negative in anticipation of strong h The Canadian dollar impact. farmer demand to replenish weakened relative to the crop nutrients following US dollar, reducing cost an expected record of goods sold. harvest. 21 PotashCorp 2014 Third Quarter Quarterly Report on Form 10-Q -------------------------------------------------------------------------------- The most significant contributors to the change in total gross margin year over year were as follows (direction of arrows refers to impact on gross margin): Net Sales Prices Sales Volumes Cost of Goods Sold i Potash prices were lower h North American totals h Shutdown weeks were as the sharp decline during were up due to low lower in 2014 the second half of 2013 distributor inventories at (14 shutdown weeks) weighed on price the start of the year, compared to 2013 realizations, though prices higher acreage and (32 shutdown weeks) rose compared to the application rates and primarily as a result of trailing quarters due to earlier second-half our strategy to match tighter supplies and record customer engagement for production with demand global demand. the fall application in 2013. season. h Costs were lower due h Our offshore sales to our workforce volumes rose due to reduction and increased demand but were operational changes constrained by limited announced in December product availability in 2013 along with our the third quarter of 2014 decision to optimize and rail constraints in production at our lowest the first half of 2014. cost facility. h The Canadian dollar weakened relative to the US dollar, reducing cost of goods sold. h More product from our lower-cost mines was sold to offshore customers resulting in a higher cost of goods sold variance. Potash Non-Financial Performance Three Months Ended September 30 Nine Months Ended September 30 2014 2013 % Change 2014 2013 % Change Production KCl tonnes produced (thousands) 1,453 1,150 26 6,169 5,852 5 Safety Total site recordable injury rate 2.53 1.75 45 1.96 1.45 35 Life-altering injuries - - - 1 - n/m Employee Percentage of senior staff positions filled internally 100% 100% - 100% 100% - Environmental Waste (million tonnes) 3.6 2.8 29 12.9 13.2 (2 ) Environmental incidents 3 3 - 12 11 9 n/m = not meaningful Production During the first half of 2014, we successfully completed a safe Canpotex entitlement run at Allan, which increased our proportion of Canpotex sales to offshore markets from approximately 49 percent to approximately 54 percent commencing July 1, 2014. Potash production rose quarter over quarter as production in 2013 was affected by additional downtime at our Cory facility (four weeks) and reduced operating rates at our Rocanville facility (no reduction in 2014). Year over year potash production rose as a reduction in shutdown weeks (discussed above) more than offset the effects of our operational changes announced in December 2013. Safety Tragically, we had a fatality at our Cory facility during the first quarter of 2014. Total site recordable injury rate increased mainly due to higher recordable injury rates for non-nested contractors. Even though fewer recordable injuries were experienced in this group there were significantly fewer hours worked during the third quarter and first nine months of 2014. Employee Due to improved fundamentals in the granular potash market, we rescinded previously announced layoff notices at our Penobsquis, New Brunswick facility (impacting 56 employees) and began a recall process at our Lanigan facility to reinstate 47 permanent employees in the second quarter of 2014, and began a recall process at our Cory facility to reinstate 38 permanent employees in the third quarter. Environmental Waste is comprised of byproducts including coarse and fine tailings and salt as brine to injection wells. Waste increased quarter over quarter due to higher mining waste per tonne (lower recovery and/or ore quality) combined with increased mining activity at certain sites. Year over year waste decreased due to lower mining waste per tonne (higher recovery and/or ore quality) combined with decreased mining activity at certain sites during the first half of 2014, partially offset by increased mining waste in the third quarter as discussed above. PotashCorp 2014 Third Quarter Quarterly Report on Form 10-Q 22 -------------------------------------------------------------------------------- Nitrogen Nitrogen Financial Performance Three Months Ended September 30 Dollars (millions) Tonnes (thousands) Average per Tonne (1) 2014 2013 % Change 2014 2013 % Change 2014 2013 % Change Manufactured product (2) Net sales Ammonia $ 269 $ 239 13 528 512 3 $ 509 $ 468 9 Urea 100 82 22 248 218 14 $ 402 $ 376 7 Solutions, Nitric acid, Ammonium nitrate 182 158 15 773 700 10 $ 236 $ 226 4 551 479 15 1,549 1,430 8 $ 356 $ 335 6 Cost of goods sold (322 ) (304 ) 6 $ (209 ) $ (212 ) (1 ) Gross margin 229 175 31 $ 147 $ 123 20 Other miscellaneous and purchased product gross margin (3) 4 3 33 Gross Margin $ 233 $ 178 31 $ 150 $ 124 21 (1) Rounding differences may occur due to the use of whole dollars in per-tonne calculations. (2) Includes inter-segment ammonia sales, comprised of: net sales $25 million, cost of goods sold $10 million and 41,000 sales tonnes (2013 - net sales $29 million, cost of goods sold $14 million and 57,000 sales tonnes). Inter-segment profits are eliminated on consolidation. (3) Comprised of third-party and inter-segment sales, including: third-party net sales $6 million less cost of goods sold $2 million (2013 - net sales $17 million less cost of goods sold $14 million) and inter-segment net sales $NIL million less cost of goods sold $NIL million (2013 - net sales $2 million less cost of goods sold $2 million). Inter-segment profits are eliminated on consolidation. Nine Months Ended September 30 Dollars (millions) Tonnes (thousands) Average per Tonne (1) 2014 2013 % Change 2014 2013 % Change 2014 2013 % Change Manufactured product (2) Net sales Ammonia $ 875 $ 899 (3 ) 1,776 1,620 10 $ 493 $ 555 (11 ) Urea 364 347 5 854 800 7 $ 426 $ 433 (2 ) Solutions, Nitric acid, Ammonium nitrate 526 489 8 2,211 1,978 12 $ 238 $ 247 (4 ) 1,765 1,735 2 4,841 4,398 10 $ 365 $ 395 (8 ) Cost of goods sold (1,001 ) (1,019 ) (2 ) $ (207 ) $ (232 ) (11 ) Gross margin 764 716 7 $ 158 $ 163 (3 ) Other miscellaneous and purchased product gross margin (3) 12 9 33 Gross Margin $ 776 $ 725 7 $ 160 $ 165 (3 ) (1) Rounding differences may occur due to the use of whole dollars in per-tonne calculations. (2) Includes inter-segment ammonia sales, comprised of: net sales $81 million, cost of goods sold $36 million and 141,000 sales tonnes (2013 - net sales $79 million, cost of goods sold $39 million and 136,000 sales tonnes). Inter-segment profits are eliminated on consolidation. (3) Comprised of third-party and inter-segment sales, including: third-party net sales $26 million less cost of goods sold $14 million (2013 - net sales $47 million less cost of goods sold $38 million) and inter-segment net sales $2 million less cost of goods sold $2 million (2013 - net sales $32 million less cost of goods sold $32 million). Inter-segment profits are eliminated on consolidation. 23 PotashCorp 2014 Third Quarter Quarterly Report on Form 10-Q -------------------------------------------------------------------------------- Nitrogen gross margin variance attributable to: Three Months Ended September 30 Nine Months Ended September 30 2014 vs. 2013 2014 vs. 2013 Change in Change in Prices/Costs Prices/Costs Change in Net Cost of Change in Net Cost of Dollars (millions) Sales Volumes Sales Goods Sold Total Sales Volumes Sales Goods Sold Total Manufactured product Ammonia $ 1 $ 26 $ (1 ) $ 26 $ 56 $ (112 ) $ 41 $ (15 ) Urea 8 5 (1 ) 12 14 (6 ) 3 11 Solutions, NA, AN 11 9 (5 ) 15 26 (21 ) 39 44 Hedge - - 1 1 - - 8 8 Change in product mix 6 (6 ) - - 6 (6 ) - - Total manufactured product $ 26 $ 34 $ (6 ) 54 $ 102 $ (145 ) $ 91 48 Other miscellaneous and purchased product 1 3 Total $ 55 $ 51 [[Image Removed: LOGO]] [[Image Removed: LOGO]] Three Months Ended September 30 Nine Months Ended September 30 Sales Tonnes Sales Tonnes (thousands) Price per Tonne (thousands) Price per Tonne 2014 2013 2014 2013 2014 2013 2014 2013 Fertilizer 571 463 $ 339 $ 335 1,699 1,361 $ 377 $ 416 Industrial and Feed 978 967 $ 365 $ 335 3,142 3,037 $ 358 $ 385 1,549 1,430 $ 356 $ 335 4,841 4,398 $ 365 $ 395 PotashCorp 2014 Third Quarter Quarterly Report on Form 10-Q 24 -------------------------------------------------------------------------------- The most significant contributors to the change in total gross margin quarter over quarter were as follows (direction of arrows refers to impact on gross margin): Net Sales Prices Sales Volumes h With key benchmark pricing at h Improved production levels across higher levels, our average realized all nitrogen facilities more than price increased. offset losses from gas curtailments in Trinidad. The most significant contributors to the change in total gross margin year over year were as follows (direction of arrows refers to impact on gross margin): Net Sales Prices Sales Volumes Cost of Goods Sold i Ammonia prices fell as h Ammonia volumes were up i Average costs, strong demand and supply due to the availability of including our hedge challenges in key production at Geismar and position, for natural producing regions were more Augusta in 2014 (both gas used as feedstock in prevalent in 2013 than projects began producing production increased 2014. part-way through the first 1 percent. Costs for half of 2013) compared to natural gas used as the same period in 2013, feedstock in Trinidad which also led to an production fell increase in saleable 6 percent (contract downstream products. price indexed, in part, to Tampa ammonia prices) while our US spot costs for natural gas increased 20 percent. Including losses on our hedge position, US gas prices rose 13 percent. h The cost of goods sold variance for ammonia mainly reflected lower costs in 2014 for natural gas used as feedstock in Trinidad production compared to 2013, partially offset by higher US natural gas costs in 2014 compared to 2013. This affected ammonia to a greater extent than urea. h The cost of goods sold variance was better for solutions, nitric acid and ammonium nitrate due mainly to the impact of costs associated with Geismar in 2013 that did not repeat in 2014. Nitrogen Non-Financial Performance Three Months Ended Nine Months Ended September 30 September 30 2014 2013 % Change 2014 2013 % Change Production N tonnes produced (thousands) 787 705 12 2,450 2,155 14 Safety Total site recordable injury rate 0.71 0.76 (7 ) 0.51 0.63 (19 ) Employee Percentage of senior staff positions filled internally n/a n/a n/a 100% 100% - Environmental Greenhouse gas emissions (CO2 equivalent tonnes/tonne of product) 2.3 2.4 (4 ) 2.3 2.3 - Environmental incidents 3 - n/m 4 1 300 n/a = not applicable as there were no senior staff positions filled during the period n/m = not meaningful Production Quarter over quarter production was impacted by a plant turnaround at our Trinidad facility in the third quarter of 2013 which did not occur in 2014. Year over year production increased mainly due to the availability of production at Geismar and Augusta as discussed above. Safety There were 11 recordable injuries in the first nine months of 2014 compared to 14 in the same period in 2013 with similar hours worked, resulting in a decrease in the nitrogen total site recordable injury rate. Environmental The three environmental incidents that occurred during the third quarter of 2014 have or are being investigated and such corrective actions as deemed appropriate have or will be taken. 25 PotashCorp 2014 Third Quarter Quarterly Report on Form 10-Q -------------------------------------------------------------------------------- Phosphate Phosphate Financial Performance Three Months Ended September 30 Dollars (millions) Tonnes (thousands) Average per Tonne (1) 2014 2013 % Change 2014 2013 % Change 2014 2013 % Change Manufactured product Net sales Fertilizer $ 201 $ 250 (20 ) 445 634 (30 ) $ 452 $ 395 14 Feed and Industrial 174 176 (1 ) 280 279 - $ 621 $ 631 (2 ) 375 426 (12 ) 725 913 (21 ) $ 517 $ 467 11 Cost of goods sold (317 ) (351 ) (10 ) $ (437 ) $ (384 ) 14 Gross margin 58 75 (23 ) $ 80 $ 83 (4 ) Other miscellaneous and purchased product gross margin (2) 3 3 - Gross Margin $ 61 $ 78 (22 ) $ 84 $ 85 (1 ) (1) Rounding differences may occur due to the use of whole dollars in per-tonne calculations. (2) Comprised of net sales of $24 million (2013 - $6 million) less cost of goods sold of $21 million (2013 - $3 million). Nine Months Ended September 30 Dollars (millions) Tonnes (thousands) Average per Tonne (1) 2014 2013 % Change 2014 2013 % Change 2014 2013 % Change Manufactured product Net sales Fertilizer $ 656 $ 835 (21 ) 1,486 1,859 (20 ) $ 441 $ 449 (2 ) Feed and Industrial 526 568 (7 ) 862 887 (3 ) $ 610 $ 640 (5 ) 1,182 1,403 (16 ) 2,348 2,746 (14 ) $ 503 $ 511 (2 ) Cost of goods sold (1,055 ) (1,153 ) (8 ) $ (449 ) $ (420 ) 7 Gross margin 127 250 (49 ) $ 54 $ 91 (41 ) Other miscellaneous and purchased product gross margin (2) 8 10 (20 ) Gross Margin $ 135 $ 260 (48 ) $ 57 $ 95 (40 ) (1) Rounding differences may occur due to the use of whole dollars in per-tonne calculations. (2) Comprised of net sales of $34 million (2013 - $20 million) less cost of goods sold of $26 million (2013 - $10 million). Phosphate gross margin variance attributable to: Three Months Ended September 30 Nine Months Ended September 30 2014 vs. 2013 2014 vs. 2013 Change in Change in Prices/Costs Prices/Costs Change in Net Cost of Change in Net Cost of Dollars (millions) Sales Volumes Sales Goods Sold Total Sales Volumes Sales Goods Sold Total Manufactured product Fertilizer $ (14 ) $ 28 $ (25 ) $ (11 ) $ (31 ) $ (14 ) $ (47 ) $ (92 ) Feed and Industrial 2 (1 ) (7 ) (6 ) (8 ) (23 ) - (31 ) Change in product mix (13 ) 13 - - (19 ) 19 - - Total manufactured product $ (25 ) $ 40 $ (32 ) (17 ) $ (58 ) $ (18 ) $ (47 ) (123 ) Other miscellaneous and purchased product - (2 ) Total $ (17 ) $ (125 ) PotashCorp 2014 Third Quarter Quarterly Report on Form 10-Q 26 -------------------------------------------------------------------------------- [[Image Removed: LOGO]] [[Image Removed: LOGO]] The most significant contributors to the change in total gross margin quarter over quarter were as follows (direction of arrows refers to impact on gross margin): Net Sales Prices Sales Volumes Cost of Goods Sold h Our average realized i The closure in July i Depreciation was higher due phosphate price of our Suwannee River to accelerated depreciation increased largely due chemical plant, related to fertilizer as a to a greater combined with result of operational proportion of our mechanical challenges changes announced in the production being at our White Springs fourth quarter of 2013 allocated to facility, constrained prior to the closure of the higher-netback feed the number of tonnes Suwannee River chemical and industrial available for sale. plant at our White Springs products, in addition facility at the end of July to improved prices 2014. for our fertilizer products because of i Unfavorable adjustments to better market our asset retirement fundamentals. obligations occurred in 2014 (due to a decrease in relevant discount rates) while favorable adjustments occurred in 2013 (due to an increase in relevant discount rates). The most significant contributors to the change in total gross margin year over year were as follows (direction of arrows refers to impact on gross margin): Net Sales Prices Sales Volumes Cost of Goods Sold i Industrial prices i Volumes fell as i Depreciation was higher due were down due to weather-related to accelerated depreciation certain contracts production issues, related to fertilizer as a being tied to input logistical issues and result of operational costs on a lagging an extended plant changes announced in the basis. turnaround at White fourth quarter of 2013. Springs in the third quarter of 2014 reduced operating rates across all our facilities and constrained our h Sulfur costs were down 19 sales. percent and ammonia costs were down 10 percent, reducing our cost of goods sold. i Unfavorable adjustments to our asset retirement obligations occurred in 2014 while favorable adjustments occurred in 2013 as a result of changes in the relevant discount rates. Phosphate Non-Financial Performance Three Months Ended September 30 Nine Months Ended September 30 2014 2013 % Change 2014 2013 % Change Production P2O5 tonnes produced (thousands) 431 533 (19 ) 1,259 1,553 (19 ) P2O5 operating rate percentage 83% 90% (8 ) 74% 87% (15 ) Safety Total site recordable injury rate 0.59 1.35 (56 ) 1.12 1.07 5 Employee Percentage of senior staff positions filled internally 60% 100% (40 ) 81% 72% 13 Environmental Water usage (m3 per tonne of product) 25 28 (11 ) 26 29 (10 ) Recycled water used in operations (percentage) 95% 94% 1 95% 94% 1 Environmental incidents 2 - n/m 3 1 200 n/m = not meaningful 27 PotashCorp 2014 Third Quarter Quarterly Report on Form 10-Q -------------------------------------------------------------------------------- Production Phosphate production fell quarter over quarter due to the loss of production at White Springs because of the closure of the Suwannee River chemical facility in the third quarter of 2014. Phosphate production was limited year over year due to weather-related production issues during the first quarter of 2014, and the closure of Suwannee River chemical facility during the third quarter of 2014 as described above. Safety Quarter over quarter the total site recordable injury rate decreased due to four recordable injuries occurring in the third quarter of 2014 (compared to 11 in the same period in 2013). Year over year the total site recordable injury rate increased as while there were fewer recordable injuries (21 in 2014 compared to 27 in the same period 2013), there were even fewer hours worked during the first nine months of 2014. Employee In the third quarter of 2014, three of five senior staff positions were filled internally while the one position was filled internally in the same period in 2013. Environmental The two environmental incidents that occurred during the third quarter of 2014 have or are being investigated and such corrective actions as deemed appropriate have or will be taken. Other Expenses and Income Three Months Ended September 30 Nine Months Ended September 30 Dollars (millions) 2014 2013 Change % Change 2014 2013 Change % Change Selling and administrative expenses $ (49 ) $ (48 ) $ (1 ) 2 $ (172 ) $ (165 ) $ (7 ) 4 Provincial mining and other taxes (52 ) (10 ) (42 ) 420 (175 ) (154 ) (21 ) 14 Share of earnings of equity-accounted investees 20 57 (37 ) (65 ) 85 174 (89 ) (51 ) Dividend income 7 31 (24 ) (77 ) 100 85 15 18 Impairment of available-for-sale investment - - - n/m (38 ) - (38 ) n/m Other income (expenses) 5 (9 ) 14 n/m 36 (21 ) 57 n/m Finance costs (47 ) (33 ) (14 ) 42 (142 ) (107 ) (35 ) 33 Income taxes (156 ) (116 ) (40 ) 34 (466 ) (587 ) 121 (21 ) n/m = not meaningful Provincial mining and other taxes were higher in the third quarter of 2014 than in the same period in 2013 due to higher potash production tax (PPT). PPT increased due in part to a higher proportion of forecasted annual gross margin earned in the third quarter of 2014 as compared to the same period in 2013. In addition, in the third quarter of 2013, PPT included a significant reduction due to a change in forecasted PPT for the year. This resulted in a reversal of part of the PPT recorded in the first half of 2013. Share of earnings of equity-accounted investees pertains primarily to Sociedad Quimica y Minera de Chile S.A. (SQM) and Arab Potash Company (APC). Lower earnings quarter over quarter and year over year were mainly due to lower earnings for SQM and APC over those periods. Quarter over quarter dividend income was down due to lower dividends from ICL. Year over year dividend income was up as the company received a special dividend of $69 million from ICL in the first nine months of 2014 (none in the first nine months of 2013). As discussed in Note 3 to the financial statements in this Form 10-Q, a non-tax deductible impairment loss of $38 million was recorded in net income on our investment in Sinofert during the first quarter of 2014. No such losses were recognized in 2013. PotashCorp 2014 Third Quarter Quarterly Report on Form 10-Q 28 -------------------------------------------------------------------------------- Weighted average debt obligations outstanding and the associated interest rates were as follows: [[Image Removed: LOGO]] For the third quarter, income taxes increased due to a higher actual effective tax rate on ordinary earnings and higher discrete tax adjustments. For the first nine months of the year, income taxes decreased due to lower ordinary earnings before taxes and discrete tax adjustments partially offset by a higher actual effective tax rate on ordinary earnings. Effective tax rates and discrete items were as follows: Three Months Ended Nine Months Ended September 30 September 30 Dollars (millions), except percentage amounts 2014 2013 2014 2013 Actual effective tax rate on ordinary earnings 28% 25% 27% 26% Actual effective tax rate including discrete items 33% 25% 29% 27% Discrete tax adjustments that impacted the rate $ (25 ) $ - $ (21 ) $ (37 ) Significant items to note are described in Note 8 to the financial statements in this Form 10-Q. For the first nine months of 2014, 70 percent of the effective tax rate on the current year's ordinary earnings pertained to current income taxes (2013 - 50 percent) and 30 percent related to deferred income taxes (2013 - 50 percent). The increase in the current portion was largely due to lower tax depreciation. Liquidity and Capital Resources Cash Requirements Contractual Obligations and Other Commitments Our contractual obligations and other commitments detailed on pages 84 and 85 of our 2013 Annual Integrated Report summarize certain of our liquidity and capital resource requirements, excluding obligations that have original maturities of less than one year, planned (but not legally committed) capital expenditures or potential share repurchases. Significant items during 2014 that affected our contractual obligations and other commitments were as follows as of September 30, 2014: Ÿ The issuance of 3.625 percent senior notes due March 15, 2024 during the first quarter of 2014 increased our long-term debt obligations by $750 million and estimated annual interest payments by $27 million Ÿ During the second quarter of 2014, the company completed the early redemption of all its outstanding $500 million of 5.250 percent senior notes due May 15, 2014. Ÿ During the third quarter of 2014, the company entered into a purchase commitment for certain phosphate products with OCP S.A. for specified purchase quantities and prices based on market rates at the time of delivery. The purchase commitment was approximately $445 million based on expected contract prices and expires in 2016. Capital Expenditures Based on anticipated exchange rates, during 2014 we expect to incur capital expenditures, including capitalized interest, of approximately $555 million for opportunity capital and approximately $575 million to sustain operations at existing levels and for major repairs and maintenance (including plant turnarounds). 29 PotashCorp 2014 Third Quarter Quarterly Report on Form 10-Q -------------------------------------------------------------------------------- Page 62 of our 2013 Annual Integrated Report outlines key potash construction projects and their expected total cost, as well as the impact of these projects on capacity expansion/debottlenecking and any expected remaining spending on each project still in progress. The most significant of these potash projects(1) on which funds are expected to be spent in 2014, excluding capitalized interest, are outlined in the table below: Forecasted Expected Completion (3) Remaining SpendingCDN Dollars (billions) 2014 Forecast Total Forecast (2) Started (Description) (after 2014) (2) New Brunswick $ 0.1 $ 2.2 2007 2014 (mine shaft and mill) $ 0.3 Rocanville, Saskatchewan $ 0.2 $ 2.8 2008 2015 (mine shaft and mill) $ - (1) The expansion at each of these projects is discussed in the technical report for such project filed on SEDAR in accordance with National Instrument 43-101 Standards of Disclosure for Mineral Projects. (2) Amounts are based on the most recent forecast amounts approved by the Board of Directors, and are subject to change based on project timelines and costs. (3) Excludes ramp-up time. We expect these projects will be fully ramped up by the end of 2015, subject to market conditions. In 2013, we began an expansion of ammonia production at our Lima, Ohio plant. We are investing approximately $210 million through the fourth quarter of 2015 ($110 million in 2014) to increase our capacity in ammonia (100,000 tonnes) and urea (73,000 tonnes). We anticipate that all capital spending will be financed by internally generated cash flows supplemented, if and as necessary, by borrowing from existing financing sources. Sources and Uses of Cash Cash flows from operating, investing and financing activities, as reflected in the unaudited interim condensed consolidated statements of cash flow in this Form 10-Q, are summarized in the following table: Three Months Ended September 30 Nine Months Ended September 30 Dollars (millions) 2014 2013 Change % Change 2014 2013 Change % Change Cash provided by operating activities $ 574 $ 616 $ (42 ) (7 ) $ 1,901 $ 2,556 $ (655 ) (26 )Cash used in investing activities (305 ) (358 ) 53 (15 ) (738 ) (1,218 ) 480 (39 )Cash used in financing activities (224 ) (333 ) 109 (33 ) (1,639 ) (1,345 ) (294 ) 22 Increase (decrease) in cash and cash equivalents $ 45 $ (75 ) $ 120 n/m $ (476 ) $ (7 ) $ (469 ) n/m n/m = not meaningful The following graph presents summarized working capital information. [[Image Removed: LOGO]] Page 87 of our 2013 Annual Integrated Report explains liquidity needs that can be met through a variety of sources and the primary uses of funds. Cash provided by operating activities was lower quarter over quarter due primarily to: Ÿ Lower net income in the third quarter of 2014; Ÿ Net distributed earnings of equity-accounted investees in 2014 compared to net undistributed earnings of equity-accounted investees in 2013; and Ÿ Cash inflows from receivables in the third quarter of 2014 were lower than the third quarter of 2013. Cash provided by operating activities was lower year over year as a result of: Ÿ Lower net income in the first nine months of 2014; Ÿ A lower non-cash provision for deferred income taxes; Ÿ Net distributed earnings of equity-accounted investees in 2014 compared to net undistributed earnings of equity-accounted investees in 2013; and Ÿ Cash outflows from receivables in the first nine months of 2014 compared to cash inflows in the first nine months of 2013. PotashCorp 2014 Third Quarter Quarterly Report on Form 10-Q 30 -------------------------------------------------------------------------------- Cash used in investing activities was primarily for additions to property, plant and equipment, of which approximately 46 percent in the third quarter of 2014 (2013 - 72 percent) and 50 percent in the first nine months of 2014 (2013 - 72 percent) related to the potash segment. Cash used in financing activities decreased quarter over quarter and was mainly impacted by share repurchases in 2013 (none in third-quarter 2014) partially offset by lower commercial paper proceeds in 2014 as compared to 2013. Year over year cash used in financing activities rose due to increased share repurchases, dividend payments and repayment of senior notes, partially offset by the issuance of senior notes (none in 2013) and commercial paper proceeds in 2014 (repayments in 2013). We believe that internally generated cash flow, supplemented if necessary by available borrowings under our existing financing sources, will be sufficient to meet our anticipated capital expenditures and other cash requirements for at least the next 12 months, exclusive of any possible acquisitions. At this time, we do not reasonably expect any presently known trend or uncertainty to affect our ability to access our historical sources of liquidity. Principal Debt Instruments [[Image Removed: LOGO]] [[Image Removed: LOGO]] (1) The authorized aggregate amount under the company's commercial paper programs in Canada and the US is $2,500 million. The amounts available under the commercial paper programs are limited to the availability of backup funds under the credit facility. Included in the amount outstanding and committed was $485 million of commercial paper. We use a combination of short-term and long-term debt to finance our operations. We typically pay floating rates of interest on our short-term debt and credit facility, and fixed rates on our senior notes. During the third quarter of 2014, we extended the maturity on $3.4 billion of our syndicated credit facility to May 31, 2019 (original maturity May 31, 2018) with the maturity on the remaining $100 million remaining unchanged and extended the maturity on our $75 million short-term line of credit to August 2015 (from August 2014). There were no significant changes to the nature of our outstanding commercial paper, including interest rates and uncommitted letter of credit facility described on Page 88 in our 2013 Annual Integrated Report. The line of credit and credit facility have financial tests and covenants, including consequences of non-compliance, referenced on page 88 of our 2013 Annual Integrated Report with which we must comply at each quarter-end. We were in compliance with all covenants as at September 30, 2014 and at this time anticipate being in compliance with such covenants through 2014. The accompanying table summarizes the limits and results of certain covenants: Debt covenants Dollars (millions), except ratio September 30, amounts Limit 2014 Debt-to-capital ratio (1) £ 0.6 0.3 Long-term debt-to-EBITDA ratio (2) £ 3.5 1.0 Debt of subsidiaries <$ 1,000 $ 6 The following non-IFRS financial measures are requirements of our debt covenants and should not be considered as substitutes for, nor superior to, measures of financial performance prepared in accordance with IFRS: (1) Debt-to-capital ratio = debt (short-term debt and current portion of long-term debt + long-term debt) / (debt + shareholders' equity). (2) Long-term debt-to-EBITDA ratio = long-term debt / EBITDA. EBITDA is calculated according to the definition in Note 9 to the 2013 audited annual consolidated financial statements for the trailing 12 months. As compared to net income according to IFRS, EBITDA is limited in that periodic costs of certain capitalized tangible and intangible assets used in generating revenues are excluded. Long-term debt to net income for the trailing 12 months was 2.4. Our ability to access reasonably priced debt in the capital markets is dependent, in part, on the quality of our credit ratings. We continue to maintain investment-grade credit ratings for our long-term debt. A downgrade of the credit rating of our long-term debt would increase the interest rates applicable to borrowings under our credit facility and our line of credit. 31 PotashCorp 2014 Third Quarter Quarterly Report on Form 10-Q -------------------------------------------------------------------------------- Commercial paper markets are normally a source of same-day cash for the company. Our access to the Canadian and US commercial paper markets primarily depends on maintaining our current short-term credit ratings as well as general conditions in the money markets. Long-Term Debt Short-Term Debt Sep 30, Dec 31, Sep 30, Dec 31, Rating (outlook) 2014 2013 2014 2013 Moody's A3 (stable) A3 (stable) P-2 P-2 Standard & Poor's A-(stable) A-(negative) A-2 (1) A-2 (1) DBRS n/a n/a R-1 (low) R-1 (low) (1) S&P assigned a global commercial paper rating of A-2, but rated our commercial paper A-1 (low) on a Canadian scale. n/a = not applicable A security rating is not a recommendation to buy, sell or hold securities. Such rating may be subject to revision or withdrawal at any time by the respective credit rating agency and each rating should be evaluated independently of any other rating. Our $3,750 million of outstanding senior notes were issued under US shelf registration statements. For the first nine months of 2014, our weighted average cost of capital was 9.3 percent (2013 - 9.7 percent), of which 88 percent represented the cost of equity (2013 - 90 percent). Outstanding Share Data September 30, December 31, 2014 2013 Common shares issued and outstanding 829,695,745 856,116,325 Options to purchase common shares outstanding 20,702,185 20,332,335 Number of stock option plans 10 9 Off-Balance Sheet Arrangements Off-balance sheet arrangements are described on page 89 of our 2013 Annual Integrated Report. We do not reasonably expect any presently known trend or uncertainty to affect our ability to continue using these arrangements. Refer to Note 11 to the financial statements in this Form 10-Q for a contingency related to Canpotex. Refer to page 89 of our 2013 Annual Integrated Report for information pertaining to our guarantees and derivative instruments. See "Cash Requirements" above and our 2013 Annual Integrated Report for obligations related to operating leases and certain of our long-term raw materials agreements which contain fixed price and/or volume components. Quarterly Financial Highlights Dollars (millions), except September 30, June 30, March 31, December 31, September 30, June 30, March 31, December 31, per-share amounts 2014 2014 2014 2013 2013 2013 2013 2012 Sales $ 1,641 $ 1,892 $ 1,680 $ 1,541 $ 1,520 $ 2,144 $ 2,100 $ 1,642 Gross margin 589 747 565 460 484 979 867 586 Net income 317 472 340 230 356 643 556 421 Net income per share - basic (1) 0.38 0.56 0.40 0.27 0.41 0.74 0.64 0.49 Net income per share - diluted (1) 0.38 0.56 0.40 0.26 0.41 0.73 0.63 0.48 (1) Net income per share for each quarter has been computed based on the weighted average number of shares issued and outstanding during the respective quarter, including the dilutive number of shares assumed for the diluted earnings per share computation; therefore, as the number of shares varies each period, quarterly amounts may not add to the annual total. Certain aspects of our business can be impacted by seasonal factors. Fertilizers are sold primarily for spring and fall application in both Northern and Southern Hemispheres. However, planting conditions and the timing of customer purchases will vary each year and fertilizer sales can be expected to shift from one quarter to another. Most feed and industrial sales are by contract and are more evenly distributed throughout the year. In the first quarter of 2014, earnings were impacted by $38 million of non-tax deductible impairment losses on our available-for-sale investment in Sinofert due to the significance by which fair value was below cost. Related Party Transactions Refer to Note 12 to the financial statements in this Form 10-Q for information pertaining to transactions with related parties. Critical Accounting Estimates There have been no material changes to our critical accounting estimate policies in the first nine months of 2014. We have discussed the development, selection and application of our key accounting policies, and the critical accounting estimates and assumptions they involve, with the audit committee of the Board of Directors, and the committee reviewed the disclosures described in this Form 10-Q. Recent Accounting Changes Refer to Note 1 to the financial statements in this Form 10-Q for information pertaining to accounting changes effective in 2014 and for information on issued accounting pronouncements that will be effective in future periods. Risk Management Execution of our corporate strategy requires an effective program to manage the associated risks. PotashCorp 2014 Third Quarter Quarterly Report on Form 10-Q 32 -------------------------------------------------------------------------------- The company's Risk Management Process of identification, management and reporting of risk is continuous and dynamic. Changes to corporate risk that result from changing internal and external factors are evaluated on a quarterly basis and significant changes in risks and corresponding mitigation activities are reported regularly to the Board of Directors through the committees, which focus on risks within their areas of oversight. Detailed discussion of the PotashCorp "Global Risk Perspective" can be found on pages 24 - 28 of our 2013 Annual Integrated Report as well as in our Form 10-K. Risk management discussions specific to potash, nitrogen and phosphate operations can be found on pages 52, 63, and 71 respectively of the 2013 Annual Integrated Report. The greatest potential risks to potash reported in the 2013 Annual Integrated Report include market supply imbalances which may result from fluctuations in global demand for product, global potash demand insufficient to consume PotashCorp capacity, physical risks particular to underground mines (such as unexpected underground rock falls and water inflow from underground water-bearing strata) and safety related risks. We mitigate the potash market imbalance and insufficient demand risks by managing production to meet market demand. Underground mine risk mitigation activities include the use of advanced geophysical surveys, microseismic monitoring, rock mechanics modeling, ground penetrating radar, training and procedures and protective structures. We mitigate the risk of unsafe actions or conditions by enhancing safety systems at all sites. Similar risks of cyclicality and market imbalance exist in phosphate and nitrogen, largely due to competitive costs, availability of supply and government involvement. The company mitigates these risks by focusing on less cyclical markets, maintaining a diversified sulfur supply portfolio and employing natural gas price risk hedging strategies where appropriate. Governance The competitive selection process for the company's external audit services (as discussed on page 93 in our Annual Integrated Report) is now complete and the Audit Committee has recommended no change at this time. Outlook Market Outlook As we move into the fourth quarter, we continue to see strong customer engagement in all key potash markets. We anticipate global shipments will surpass the upper end of our previous guidance, and now forecast totals for 2014 to be in the range of 58-60 million tonnes. While recent weakness in crop prices is expected to result in some reduction to global crop acreage, we believe potash remains an affordable and necessary investment for growers as they look to offset lower prices by enhancing yields. In North America, the fall application season is underway and product demand remains strong. Given what we believe are especially low potash inventories throughout the North American supply chain, distributors are actively positioning product in advance of anticipated needs. Even though dealers are taking these steps, we forecast that sales volumes will slow through the fourth quarter, with the majority of PotashCorp's shipments fulfilling previously committed summer-fill tonnes. In Latin America, product for the key planting season is now largely in place and we believe buyers have shifted their focus to Safrinha crop requirements. Although customers continue to secure potash tonnage, we expect shipments to this region will begin to reflect the typical seasonal slowdown as the end of the year approaches. Even with this expected slowdown, we believe annual Latin American demand will again establish a record. In both China and India we have seen encouraging potash consumption trends, including increased demand for compound fertilizers with higher potassium content. Canpotex continues to deliver product to both markets under previous commitments and we anticipate shipments will remain strong during the final quarter of 2014. Potash demand in Other Asian countries (outside of China and India) remains healthy. Stronger demand for standard product through the second half of 2014 has translated into higher transacted prices in recent tenders and is expected to be reflected in our realized prices in early 2015. Financial Outlook As a result of these market conditions, we have increased our estimate for potash annual sales volumes to 9.0-9.2 million tonnes. Fourth-quarter shipments are expected to be heavily weighted towards offshore contract markets and to result in lower average realizations. We now anticipate potash gross margin will approximate $1.3-$1.4 billion. We expect robust nitrogen fundamentals, especially for ammonia, will continue through the balance of the year. While gas supply restrictions at our Trinidad facility are now anticipated to exceed our previous estimates, sales volumes are expected to outpace previous-year levels and result in record nitrogen gross margin in 2014. In phosphate, we anticipate relatively stable markets through the balance of the year. Our sales volumes are expected to remain below those of fourth-quarter 2013 with the closure of our Suwannee River chemical plant. Given these considerations, we now forecast our 2014 combined nitrogen and phosphate gross margin will be in the range of $1.2-$1.3 billion. We have revised our annual estimate for income from offshore investments to a range of $205-$215 million to better align with projected earnings and associated tax changes in Chile and Israel. The Chilean tax change is also expected to impact our annual 33 PotashCorp 2014 Third Quarter Quarterly Report on Form 10-Q -------------------------------------------------------------------------------- effective tax rate, which is now anticipated to be in the range of 27-29 percent. Based on these factors, we now expect our annual earnings range to be $1.75-$1.85 per share. [[Image Removed: LOGO]] [[Image Removed: LOGO]] Forward-Looking Statements Certain statements in this Quarterly Report on Form 10-Q, including those in the "Outlook" section of Management's Discussion and Analysis of Financial Condition and Results of Operations, contain forward-looking statements or forward-looking information ("forward-looking statements"). These statements can be identified by expressions of belief, expectation or intention, as well as those statements that are not historical fact. These statements often contain words such as "should," "could," "expect," "may," "anticipate," "believe," "intend," "estimates," "plans" and similar expressions. These statements are based on certain factors and assumptions as set forth in this Form 10-Q, including with respect to: foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities and effective tax rates. While the company considers these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect. Forward-looking statements are subject to risks and uncertainties that are difficult to predict. The results or events set forth in forward-looking statements may differ materially from actual results or events. Several factors could cause actual results or events to differ materially from those expressed in forward-looking statements including, but not limited to the following: variations from our assumptions with respect to foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities, and effective tax rates; risks and uncertainties related to operating and workforce changes made in response to our industry and the markets we serve; changes in competitive pressures, including pricing pressures; risks and uncertainties related to our international operations and assets; fluctuations in supply and demand in the fertilizer, sulfur, transportation and petrochemical markets; costs and availability of transportation and distribution for our raw materials and products, including railcars and ocean freight; adverse or uncertain economic conditions and changes in credit and financial markets; the results of sales contract negotiations within major markets; unexpected geological or environmental conditions, including water inflows; economic and political uncertainty around the world; risks associated with natural gas and other hedging activities; changes in capital markets; unexpected or adverse weather conditions; changes in currency and exchange rates; imprecision in reserve estimates; adverse developments in new and pending legal proceedings or government investigations; acquisitions we may undertake; increases in the price or reduced availability of the raw materials that we use; strikes or other forms of work stoppage or slowdowns; timing and impact of capital expenditures; rates of return on, and the risks associated with, our investments and capital expenditures; changes in, and the effects of, government policies and regulations; security risks related to our information technology systems; risks related to reputational loss; and earnings, and the decisions of taxing authorities, which could affect our effective tax rates. Additional risks and uncertainties can be found in our Form 10-K for the fiscal year ended December 31, 2013 under the captions "Forward-Looking Statements" and "Item 1A - Risk Factors" and in our filings with the US Securities and Exchange Commission and the Canadian provincial securities commissions. Forward-looking statements are given only as at the date of this report, and the company disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. |